Manulife, Sun Life pin hopes on booming Asia for growth

These are hard times for Canadian life insurers facing pressures ranging from record low interest rates and harsh new accounting rules to shrinking demand for their core products.

Thank goodness then for Asia, shining like a beacon on the other side of the planet with its booming economy and rising middle class, where, according to McKinsey & Co., spending on life insurance products is growing at 11% a year, about five times as fast as in Europe and the U.S.

Such statistics must provide inspiration for executives at Manulife Financial Corp. and Sun Life Financial, the country’s largest and third-largest life insurers respectively, both of which are investing heavily in the region.

The entire industry in North America is suffering from what amounts to a perfect storm characterized by rock-bottom interest rates and shrinking profit margins on insurance products. No wonder players are eyeing the greener pastures overseas.

Related

Both Manulife and Sun Life have been aggressively expanding their footprint in Asia, with Manulife reporting record insurance sales in South East Asia, especially Indonesia where sales rose 38%. Wealth management was also on a tear, with sales in the region up 61% compared to the same three month period last year. Profit at Sun Life Asia was up more than 30%.

Attracted by such impressive gains, the Canadian life insurers would love to have an even bigger presence in Asia and they’re particularly attracted by opportunities presented by the recent sale of Asian insurance operations of some of their bigger foreign competitors such as ING Groep.

But they’re held back for several reasons. Number one, competition from other bidders has driven up prices so much that buyers may end up waiting many years before getting a return on such investments. The second reason is that due to recent losses and tougher regulatory oversight, players are under pressure to exercise great caution in how they deploy their capital.

Still, at current growth rates the Asian life insurance market will grow to nearly US$1-trillion in the next five years, according to McKinsey & Co.

Manulife chief executive Don Guloien said in an interview that the company has no shortage of capital.

“We are not constrained by capital, we are able to provide whatever capital is needed to grow our Asian business,” he said, adding that the only reason the company has held back on deals is “because we are very disciplined acquirers and we don’t pay more than we think businesses are worth.”

Manulife on Thursday reported a third-quarter loss of $227-million, compared to a loss of $1.277-billion last year. The results, which were ahead of expectations, included a $1-billion charge associated with the company’s overview of actuarial assumptions, plus a $200-million goodwill writedown.

We are not constrained by capital, we are able to provide whatever capital is needed to grow our Asian business

“We have made significant progress towards our strategic priorities this quarter — we expanded our distribution networks and continued to develop our franchises, saw growth in our North American mutual fund businesses and again delivered record funds under management,” said chief executive Don Guloien.

However, due to ongoing economic headwinds, the Toronto-based company said it has reconsidered its previous goal of topping $4-billion in net income by 2015 and is now targeting 2016.

The picture at Sun Life, at least at first glance, was more positive, with third-quarter earnings — announced Wednesday evening — of $383-million, up from a loss of $621-million, in line with analyst projections.

The quarter was helped by big gains in Sun Life’s wealth management business, especially in the U.S.

But digging into the numbers, National Bank Financial analyst Peter Routledge highlighted what appear to be problems in the U.S. insurance business resulting in continued “material charges to book value from every major risk associated with long-term life insurance and annuities.”

While the company sees the U.S. losses being offset by gains in Canada and the U.K., Mr. Routledge worries that it’s a “risky bet” to assume that the positive and negative pressures will continue to cancel each other out indefinitely.

One of the more key metrics in the financial industry is return on equity, essentially a measure of the health of a company. Canada’s banks, which are also struggling with headwinds, consistently report ROE’s in the high teens, even the low twenties. Sun Life’s came in at 11.1% in the most recent quarter, up from negative 17.4% in the year-earlier period. Manulife was at negative 4.6%, a big improvement from negative 22.4% last year.